Sebi asks funds to reveal names, origin of investors

Mumbai: The Indian capital market regulator has asked several angel funds to disclose identities of their investors and whether these investors are based abroad.

The funds have to share the information, along with the Permanent Account Numbers (PAN) of their investors, with the Securities & Exchange Board of India (Sebi) by November 21.

It is unclear what the regulator plans to do with the data, but industry persons said it could well be to check whether the comparatively easier regulations of angel funds are being misused to overcome restrictions on foreign direct investment (FDI) or indirectly acquire equity stake in a company.

"Sebi probably wants to know the extent to which foreign investors are using the AIF (alternative investment fund) route. We have seen attempts to onboard non-resident investors without PAN which is the basic requirement of investment in India unless specifically exempted. However, I understand this is the first time that the regulator has asked funds to share names of investors and whether they have foreign origin," said Venkatesh Prabhu, director at MITCON Credentia Trusteeship Services Limited.

With similar details on investors may be sought from other funds, till now only angel funds have been told to give the information.

Unlike other categories of AIFs, like private equity and venture capital funds, angel fund investors can pick and choose the investee companies where they put their money. This is because Sebi AIF regulations exempt angel funds from the requirement of 'blind pooling' - in other words, investors are not mandatorily required to proportionately participate and have exposure in all the underlying investments made by the fund, which is the general requirement for all other categories of AIFs.

Investors in an AIF are supposed to have PAN and file Income tax returns in India. Tax is withheld by funds before distributing the earnings to local and foreign investors.

"An investor, be it local or a non-resident, who is unwilling to disclose its identity as a stakeholder may choose an angel fund to route the investment in the chosen company. Also, an offshore investor, instead of directly buying into a company, may hold shares through an angel fund," said an advisor to some of the funds.

Even if a predominant number of investors in an AIF are non-resident individuals or entities, an investment by an AIF - which is a Sebi regulated domestic entity - in a local company is treated as local investment (and not construed as FDI).

While Sebi officials could not be reached, two persons familiar with the subject said that the regulator is collecting a lot of information on AIFs and would like to have a greater visibility of the type of investors in the funds. About ₹1 lakh crore has been collectively mobilised by all categories of AIFs in the past one years.

As per the communique from Sebi, the funds have to state the amount committed by an investor, the date when the contribution agreement was signed, and the amount invested as on October 31, 2022.

Sebi has been collecting information across the funds industry. On occasions, such queries follow complaints from investors. In May, the regulator had asked angel funds to spell out "in what manner the pro-rata rights of all investors is maintained in all the investments." The funds were told to also share the number of investors in the pool, whether investors can exit before the tenure of the fund expires, the 'commitment period' till when a fund can cut deals to buy into startups, the target corpus, and the timelines for initial and final closings of a fund.